Two weeks ago, the U.S. Supreme Court denied a writ of certiorari requested by a marijuana dispensary that had sued to enjoin the IRS from investigating its business records. The case highlights how the federal income tax continues to pose difficulties for marijuana legalization.
Green Solution Retail, Inc. sold marijuana out of several locations in the state of Colorado. The IRS sought documents and information from Green Solution in order to determine the applicability of Section 280E of the Internal Revenue Code. That section disallows any credit or deduction paid or incurred in the trade or business of trafficking in controlled substances within the meaning of Schedule I and II of the Controlled Substances Act (the “CSA”). Marijuana is listed as a controlled substance under Schedule I of the CSA. And while the sale of marijuana may be legal under Colorado law, it continues to be illegal under federal law.
Green Solution sued the IRS to enjoin it from investigating into whether Green Solution had trafficked in a controlled substance in violation of federal law. Green Solution also sought a declaratory judgment that the IRS was acting outside of the scope of its statutory authority when making a finding that a taxpayer had trafficked in a controlled substance.
The United State District Court for the District of Colorado found that the Anti-Injunction Act (the “AIA”) and the Declaratory Relief Act (the “DRA”) barred Green Solution’s claims and dismissed the action with prejudice for lack of subject matter jurisdiction.
On appeal, the U.S. Court of Appeals for the Tenth Circuit agreed with the district court that Green Solution’s claims were barred. The AIA prohibits the courts from hearing any suit filed “for the purpose of restraining the assessment or collection of any tax . . . .” In Lowrie v. United States, the Tenth Circuit had held that the AIA applied to suits that sought to enjoin activities leading up to an assessment. The Tenth Circuit rejected Green Solution’s argument that the U.S. Supreme Court’s decision in Direct Marketing Association v. Brohl implicitly overruled Lowrie, observing that Direct Marketing did not involve the AIA and that the Supreme Court indicated that its holding in Direct Marketing was limited to the case’s unique facts.
The Tenth Circuit also disagreed with Green Solution’s argument that its suit was not covered by the AIA because the IRS was acting outside of the scope of its authority in investigating whether Green Solution had trafficked in a controlled substance. Green Solution contended that the IRS had to show that a taxpayer had violated the CSA in order for Section 280E to apply and that an investigation into whether there was a violation of the CSA was a matter properly left to the United States Attorney. Thus, Green Solution claimed that it was not attempting to prevent the IRS from enforcing Section 280E; rather, it was attempting to prevent the IRS from investigating potential violations of the CSA. However, the Tenth Circuit rejected this argument, noting that a criminal investigation wasn’t necessary in order for Section 280E to apply and that a determination of whether to allow or disallow deductions was clearly within the authority of the IRS. The Tenth Circuit similarly held that DJA prohibited the court from granting declaratory relief in the case of federal taxes.
As a result, the Tenth Circuit affirmed the district court’s decision to dismiss Green Solution’s suit.
Green Solution is far from the only marijuana dispensary to be investigated by the IRS. Section 280E seems to make it relatively easy for the IRS to generate federal income tax assessments against these dispensaries by denying their claimed deductions. Arguments similar to those of Green Solution have been raised in other marijuana dispensary cases, with about as little success.
In March 2017, bills were introduced in the U.S. House and Senate to modify Section 280E so that deductions would be allowed for a trade or business that consisted of marijuana sales in compliance with state law. However, so far these bills don’t seem to be gaining any traction.
And now, by refusing to hear Green Solution’s case, the Supreme Court appears to be rejecting potential end runs around Section 280E.